Champion of the wireless spectrum auction dies at 102

Economist Ronald Coase died on Monday at the grand old age of 102. He was awarded the Nobel Prize in economics in 1991 for overturning the conventional wisdom on transaction costs and property rights in the economy.

While not a household name like Milton Friedman, Coase was one of the great free market champions at The University of Chicago and laid the groundwork of one of tech’s greatest games: bidding on wireless spectrum. He is best known for two influential essays “The Nature of the Firm” (1937) and “The Problem of Social Cost” (1960), the latter basically arguing that government regulators weren’t as good at regulating as the open market.

In the late 1950s companies only had to meet legal requirements and pay relatively small fees to license radio wave frequencies. Coase argued that it was far more efficient to auction off the bands through negotiation and allow them to be bought and sold thereafter — basically, treat the frequencies like any other piece of property.

At the time, this was considered heresy. The New York Times tells the story of a dinner he attended while teaching at the University of Virginia (before he went on to University of Chicago).

The astonished faculty there wondered, according to one of their number, George J. Stigler, “how so fine an economist could make such an obvious mistake.” They invited Professor Coase to dine at the home of Aaron Director, the founder of the journal, and explain his views to a group that included Milton Friedman and several other Nobel laureates-to-be.

“In the course of two hours of argument, the vote went from 20 against and one for Coase, to 21 for Coase,” Professor Stigler later wrote. “What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.” Professor Coase was asked to expand on the ideas in that essay for the journal. The result was “The Problem of Social Cost.”

But not all fawn over Coase’s legacy. The New Yorker‘s John Cassidy points out that “His famous ‘Coase theorem’ was used to justify a hands-off approach to big business on the part of politicians, regulatory agencies, and judges, leaving pollution and other economic problems to the corrective powers of the free market.”

But Cassidy goes on to point out this was not Coase’s intent.

As a conservatively inclined economist, Coase was instinctively skeptical of government regulations, but he was also an English empiricist who recognized that reality is complicated. He didn’t believe in laissez-faire, and he freely admitted that the Coase theorem didn’t apply to many cases of pollution and other instances of what economists refer to as “negative externalities,” especially those that affect large numbers of people.

Indeed, Coase didn’t even think of the Coase theorem as a full-scale economic theory, but merely as a useful mental exercise that could be carried out before passing onto more realistic cases. It was left to less careful proselytizers to exploit Coase’s work in their crusades against big government. In their hands, his subtle reasoning was bowdlerized and distorted.

Either way, Coase undoubtedly had a big impact on the way that smartphone in your pocket signs on to your e-mail or sends a text message.